Stretching Your IRA Using a Charitable Trust

Sandy Calbreath, Trust Officer

A client of ours, "Joe", was an elderly widower who wanted to provide for his disabled son through his estate and eventually provide for charities. Since his major assets were an Individual Retirement Account (IRA) and a tax-deferred annuity, Joe’s plan for the IRA and the annuity was to make monthly payments to his son after Joe’s death.  There were several drawbacks to his plan:

  1. There would be a substantial income tax liability upon Joe’s death.
  2. The monthly income from Joe’s IRA and tax-deferred annuity would disqualify the son from receiving state and federal disability benefits.   
  3. There was no provision for charity after the son’s lifetime.  

In order to resolve these problems we worked with Joe’s attorney and CPA to create a better plan.  The attorney drafted a charitable remainder trust (CRT) which Joe then designated as the beneficiary of his IRA and tax-deferred annuity.  A “special needs” trust for the son was created to provide for his supplemental needs over and above federal and state disability benefits.

After Joe’s lifetime, the CRT will pay a fixed percentage of the trust assets into the special needs trusts for the son’s lifetime.  Since the special needs trust allows the trustee to make discretionary payments that are supplemental to state and federal aid and are not meant for the son’s basic support requirements, payments for the son’s benefit from the special needs trust will not disqualify him from receiving disability benefits.

After the son’s life, the balance in the special needs trust will repay the state for the son’s unreimbursed medical costs.  The balance of the CRT will go to the charities that were close to Joe’s heart.  To summarize, the benefits of this plan are:

  1. Joe’s estate will save over $100,000.00 in income taxes.
  2. The son will continue to receive state and federal disability benefits.  
  3. The son will have professional asset management and assistance with his personal care.
  4. The charities will ultimately receive a sizable endowment.

Individual Retirement Accounts now comprise a significant asset in most people’s estates because the government allows them to accumulate on a tax-deferred basis.  Naturally, when funds are withdrawn, either during retirement or due to death, the taxes must be paid.  If one is in a high income tax and high federal estate tax bracket, it is possible that 80% of a retirement account could be lost to taxes.  Therefore, the coupling of an IRA with a CRT could provide a significant tax shelter.  The IRS encourages this form of planning because it promotes support of charitable causes by the private sector. 

As discussed above, special care must be taken when an individual is disabled and receiving state and federal benefits since outside income could cause him or her to lose those benefits.  We were pleased to be part of the solution for Joe and his family in this creative and tax-wise solution to a difficult situation.

Print Date:  Fall 2006